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Three standard deviations: the month defense was already priced in — February 2020

Article

The extreme

An indicator three standard deviations from its own mean is almost a physical limit: the statistics rarely go further. In February 2020, that is where the Cyclical/Non-Cyclical ratio came to rest — the thermometer that measures the appetite for sectors sensitive to growth. It was not the start of a rotation into defense. It was a state already accomplished. In numbers: the z of that ratio closed at 3.09, stretched at the top of the scale. In the same month, Utilities rose against the broad market to a z of 2.23 and Commodities in reais jumped to 1.57. The money was already entirely inside the defensive perimeter.

What happened next

The extreme did not call for a reversal; it called for confirmation. The intermarket aggregate barely moved — from 38.2 to 39.82, stuck in moderate risk_off — while underneath the rotation kept running hard. It was the calm of the summary number hiding a displacement already complete. When the global shock arrived the following month, it did not find a market deciding where to hide: it found a market that had already decided. The stretch to three deviations was not the peak to be undone; it was the warning that defense was set up before it was needed.

What did not happen

Three deviations seem to scream "reversal imminent": a number so far from the mean ought to come back. That is not what the record showed. The ratio did not retreat at once — it held at the top, because measuring the extreme is not the same as marking the turning point. And the intermarket summary number, nearly frozen at 39.82, carried no alarm at all. Anyone who read only that one missed the entire month.

The honest verdict

A statistical extreme describes a state, not a calendar. The Cyclical/Non-Cyclical ratio at 3.09 said with precision where the capital already was — not when it would leave. The average lies by omission; it is the components that tell the story.

Continue reading: March 2020 was the bottom · The April 2020 turn · The intermarket reading, the map of where the money runs →

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Characters: Structure (intermarket) · Flow (risk appetite)